A Supreme Court justice in Brooklyn has forcefully rejected a bid by one of the nation’s largest mortgage lenders to avoid application of New York’s six-year statute of limitations in foreclosure cases.

In a 42-page opinion, Justice Dawn Jimenez-Salta ruled that Wells Fargo bank could not use a Brooklyn homeowner’s participation in a federal program created to help financially strapped homeowners to escape the six-year bar on new foreclosure lawsuits.

Frenkel Lambert Weiss Weisman & Gordon, the firm that represented Wells and its client, U.S. Bank, in the litigation over the statute of limitations did not respond to an inquiry as to whether the decision would be appealed. Neither did Woods Oviatt Gilman, the firm that now represents the two.

Unless reversed, the Oct. 31 ruling leaves Wells Fargo’s client with no recourse to collect on the $639,000 loan at a 7.5 percent interest rate, which was issued to Alberto Martinez in 2005 to finance the purchase of his home in the Ditmas Park section of Brooklyn. In this instance, the owner of the loan was a mortgage-backed investment fund and Wells was acting as its agent in its dealings with Martinez. Most of the nation’s largest banks have affiliated businesses handling dealings between lenders and property owners whose home purchases they have financed.

The ruling is one of a handful of trial-court rulings to hold that homeowners’ ultimately unsuccessful efforts to obtain lower monthly mortgage payments under the federal Home Affordable Modification Program (HAMP) do not provide lenders with a way to escape New York’s statute of limitations.

The statute of limitations problem posed in the Martinez case is likely to be a recurring one for lenders and entities to whom they sell their mortgage loans if Jimenez-Salta’s opinion is affirmed on appeal. The reason for that is that the statute of limitations issue surfaced in Martinez as a direct result of the collapse in 2011 of the Steven J. Baum Law firm, which at the time was the largest lender firm in New York, handling about 40 percent of 46,000 foreclosure lawsuits filed statewide, The New York Law Journal reported. Martinez’ case was one of tens of thousands of cases that the Baum firm was handling at the time of its collapse at the end of 2011 in the face of an avalanche of adverse publicity and scathing judicial criticism.

The combination of the Baum firm’s size at the time of its collapse and the sweep of the Lippman rule requiring an attorney’s affidavit in every pending case make it highly likely that the statute of limitation problem, encountered by Baum’s successor firm, Frenkel Lambert, in the Martinez case, will be a fiercely litigated issue in many cases.

Second Foreclosure Suit 5 Weeks Too Late

In 2007, Martinez ran into trouble paying his mortgage when he lost his job, according to his lawyer, Alice Nicholson. U.S. Bank National Association, which is the trustee of the investment fund that now owns the Martinez’ mortgage loan, with Wells Fargo as its agent brought suit triggering the running of the six-year limitations period on Dec. 7, 2007.

At the end of 2011, just prior to the Baum firm’s closing its doors, Wells Fargo and U.S. Bank hired Frenkel Lambert to handle Martinez’ case. Two years later in December 2013, Frenkel Lambert secured an order dismissing the 2007 foreclosure case because it was unable to verify the accuracy of filings the Baum firm had made in the case as required under the Lippman rule.

The deadline set by the statute of limitations for filing a foreclosure case to recover upon Martinez’ defaulted loan occurred six years after the original filing, on Dec. 7, 2013. Frenkel Lambert did not file its new action until Jan. 14, 2014, approximately five weeks too late. (Story resumes at the bottom of the “Timeline.”)

Timeline

Dec. 19, 2005—Martinez takes a $639,000 mortgage loan at an adjustable rate to finance the purchase of his home in Ditmas Park, Brooklyn.

Absent a legal exception to the limitations period, the tardy filing precluded U.S. Bank and Wells from recovering upon the $639,000 loan that Martinez took out to finance the purchase his home in 2005. The latest tally of the loss referenced in Jimenez-Salta’s opinion (p.14) is $740,000 as of July 2009 and the meter has been climbing at the annual rate of 7.5 percent in interest since then.

Martinez Pays $22,000; No Modification Approved

In opposing Martinez’ motion for dismissal based upon the statute of limitations, Frenkel Lambert argued that Martinez had reinstated the debt under the 2007 mortgage, which otherwise would have been precluded by the limitations bar, by making six partial payments toward that debt under two payment plans suggested by Wells: a forbearance plan (Opin. 10-12) requiring four payments in March through June 2009 and a HAMP trial modification HAMP trial modification (Opin. 13-14), requiring three monthly payments from September through December 2009.

The forbearance plan required Martinez to pay his original payment amount of $4,668 a month with a balloon payment of $112,000 in June. In the HAMP trial, his monthly payments were nearly cut in half to $2,400 a month. Both modification efforts committed U.S. Bank and Wells to suspend the foreclosure process during the required payment periods.

In all, Martinez paid $21,000 to meet the six monthly payments. He did not make the $112,000 balloon payment, an unusually high amount likely to be out of reach for a homeowner on the brink of foreclosure.

The New York Court of Appeals in 1994 rejected the same argument as being mounted in 2016 by the Wells and U.S. Bank. New York’s top court in Petito v. Piffath ruled that a partial payment toward a settlement in a foreclosure case could not revive the limitations period without an “express acknowledgment of [the borrower’s] indebtedness” or “an express promise to pay [plaintiff] per se.” In 1991, the Third Department ruled to the same effect in Sichol v. Crocker.

The Petito court (p.4) formulated its test to be so rigorous that it would “warrant a jury in finding an implied promise to repay” the entire debt, which had become uncollectable because of the statute of limitations. Under black letter law, a finding of an “implied promise” means that the two sides have forged a binding contract.

Building upon that concept, Jimenez-Salta drew a connection between the two 1990s precedents and the Appellate Division, Second Department’s ruling in Wells Fargo Bank N.A. v. Meyers. In Meyers the Second Department, which is based in Brooklyn, expressly rejected the notion that an agreement to conduct a HAMP trial created binding obligations for both sides. Instead, Justice Thomas A. Dickerson, writing for a unanimous panel, characterized a modification trial as “merely a trial arrangement.”

Just as the Court of Appeals concluded that there was no binding agreement in Petito, Jimenez-Salta concluded, there was no binding agreement in Martinez’ case. Martinez’ payments, made under the forbearance plan and HAMP trial were “conditional payments,” made in return for Wells Fargo’s agreement not to move forward with a foreclosure sale until it could be determined whether Martinez would be entitled to a reduced monthly payment level, Jimenez-Salta concluded. Most tellingly, in Martinez, as in the 1991 Third Department precedent, the future modification the parties agreed to work toward never came to pass.

Strong Deterrent Needed

Undoubtedly, the application of the statute of limitations in Martinez’ case to extinguish the use of his home as collateral for his mortgage loan was a harsh result for U.S. Bank. But, not so much so when measured against Wells’ cavalier approach, as the bank’s agent, to its obligations under HAMP and New York’s law requiring good faith negotiations to work out a loan modification.

In the early years of this nine-year saga, when working with the Baum firm, Wells structured a forbearance plan that was destined to fail. Then, apparently without explanation, Wells never approved a HAMP modification, which would have halved Martinez’ monthly payments, even though he had made all six required by the two workout plans. Wells then apparently waited two years to tell Martinez that it had found him unqualified for a modification. Making matters even worse, Wells did not abide by its own commitment to hold the foreclosure case in abeyance until the trials were completed.

Those disturbing tactics were reflected in many of the defunct Baum firm’s cases. Though Lippman did not refer by name to the Baum firm, the rule requiring sworn statements from attorneys was justified as necessary to curb tactics, such as robosigning and failure to verify essential facts—tactics that judges often, in exasperation, faulted the Baum firm for using.

Typical were former Brooklyn Justice David I. Schmidt’s remarks in U.S. Bank v. Thomas, 40 Misc. 3d 1241 [A] (2013).* Finding “absolutely no progress” in the two years since a homeowner had initially submitted financial information to support a modification, Schmidt ticked off a lengthy list of “dilatory” lapses that “would continue ad infinitum if not checked.” Among the lapses cited by Schmidt were losing documents the homeowner had submitted, making duplicative requests for the same information, failure to examine submitted information and ignoring HAMP rules.

Jimenez-Salta rightly decided to reject U.S. Bank’s and Wells’ contention that, once the statute of limitation surfaced years later, their new lawyers should be permitted to go through these same haphazardly maintained files in search of evidence that Martinez had made payments or signed documents reflecting an intent to reinstate his debt.

Those tactics plunged the Martinez family into four years of limbo during which the possibility of losing their home was a constant worry. A strong deterrent is needed to curb those tactics and the pain they inflict upon homeowners. Jimenez-Salta’ decisive “no” to Wells’ and U.S. Bank’s push for relief from the six-year bar provides that much needed deterrent.

*The New York Reporting Service did not format the Thomas opinion in a file capable of being linked to.